Bitcoin Network Hash Rate as Sentiment

Bitcoin has a built-in sentiment indicator that could be used as a tool for predicting market movements. This tool is the network hash rate, which represents the amount of processing power being used to verify transactions and secure the network.

Hash rate is a lagging indicator, and tells us if the owners of the processing power are bullish or bearish on Bitcoin. If they think the value of a Bitcoin is going to continue dropping, they might turn off their computers, causing the network hash rate to drop. If they think the value of a Bitcoin is going to hold or move higher, they might keep their computers on or add to their processing power. The following chart represents Bitcoin Price vs Network Hash Rate for 2011 thus far:

It is clear that as the price took a steep dive from the high in June, the network hash rate actually continued to climb. It was not until the end of August that it took a decisive turn toward the downside. Through October, the curve grew steeper, indicating ever-increasing bearish sentiment.

What does this data tell us about the future? Well, traditionally, the lower sentiment goes, the closer we are to finding a bottom. Various trading indicators have already revealed that we're there, however, this additional sentiment indicator gives us another tool with which to work. The steep drop in hash rate over the last few weeks only further reassures us that we're either approaching or have already found a bottom.

Assuming the bottom is in, with Bitcoin up more than 75% from the $2.05 low, we should anticipate an additional price increase before hash rate levels off and turns upward.

Posted in: sentiment,trading